Posts Tagged ‘CMBS’

CMBS Poised for a Comeback

Wednesday, February 19th, 2014

CMBS was a $230 billion industry prior to the recession. Today, we live in an era of lowered expectations where every victory needs celebrating as we get back into gear. Take Chicago, where lenders originated and sold off $2.48 billion in loans on Chicago-area properties last year, more than double the $1.20 billion in 2012, according to Trepp LLC, a New York-based research firm. Nationally, CMBS lending rose 85 percent last year, to $82.23 billion. So, we are 35% of the way back. A big part of this rebound is that lenders have eased rates and LTVs. Last year, the average U.S. CMBS loan equaled 63.6 percent of the property’s value, up from 59.8 percent in 2007, according to Trepp.

Another signal of the rebounding bond market is that troubled loans have been getting worked out and traded. First, CWCapital Asset Management LLC put properties with $2.57 billion of unpaid loan balances up for sale. Now, Blackstone Group LP (BX), Starwood Capital Group LLC and CIM Group are all following suit. About 700 bidders registered interest in the auction, which includes foreclosed loans, according to Morgan Stanley. What’s happening is that special servicers, seeing the surge in property values, are unwinding holdings from the real-estate collapse. According to Green Street Advisors Inc., commercial property prices have rallied 71 percent from their 2009 low, surpassing 2007 highs in some areas.

Looking ahead, many experts predict that U.S. CMBS lending will top $100 billion this year. The Chicago area could surpass $3 billion in 2014.

QE3 A Boon to CMBS

Tuesday, November 13th, 2012

If history repeats itself, QE3 will be good for commercial mortgage-backed securities (CMBS). The Fed’s third round of quantitative easing – which is purchasing $40 billion of residential mortgage-backed securities (RMBS) each month from Fannie Mae and Freddie Mac – will free up money for the commercial real estate market and lure investors away from other vehicles in their hunt for maximum yield.  QE3 is expected to last at least until 2015.

“The primary difference between 2012 and 2010 is that commercial property prices in healthy markets are stronger than they were just two years ago.  At its peak, CMBS constituted 40 percent of all commercial real estate loans,” said John O’Callahan of CoStar.  O’Callahan notes that “Investment returns of 40 percent or more for riskier assets during QE1 were largely a result of a bounce-back from the lows caused by investor panic in late 2008 through early 2009.  The overall impact of QE becomes clearer upon examining QE2.  Prices of equities and high-yield bonds, including CMBS, gained a respectable 12 to 15 percent.”

Low interest rates mean that returns will narrow to as little as 150 basis points, forcing investors to look elsewhere for respectable yields.  Currently, B-piece CMBS investors are achieving 20 percent and higher yields.  By contrast, the Dow Jones Industrial Average’s yield has remained below three percent each of the last 20 years.

CMBS has “been a boon for us,” said Kenneth Cohen, head of CMBS at UBS Securities.  “You’ve seen a fairly good size increase in loan pipelines.  Our pipeline has increased probably 50 percent over the last six weeks.”  Borrowers also are cashing in on the favorable loan terms.  According to Fitch Ratings, loans in 2012 are averaging 95.7 percent of a stressed property’s estimated value; that’s up from 91.6 percent in 2011.

Despite the good news, industry experts don’t expect the resurgent CMBS market to resolve all financing woes.  For example, the encouraging loan terms are of minimal help to commercial real estate owners who are under water, nor will new issuance be adequate to refinance the $54 billion in CMBS loans coming due this year.  Additionally, some ratings firms warn that the credit quality of CMBS loans could increase risk for some investors.  In response, Moody’s Investor Services’ now requires that senior bonds have expensive credit protection.

CMBS Stages a Comeback

Monday, March 14th, 2011

CMBS activity came back strongly during February with more than $6.5 billion in new securitization reported. Additionally, Freddie Mac brought two multifamily-backed offerings totaling $1.86 billion to market.  February’s level of activity is almost two-thirds of all CMBS deals offered in 2010.  The level resembles 2007, when commercial mortgage-backed securities offerings were at their peak.  Because of CMBS’ resurgence, the commercial real estate market is both bullish and fretful.  The rising volume in CMBS loan origination is a welcome sign that liquidity is returning to the markets.  The fact that a relatively large amount was created during the year’s shortest month is raising worries that the still delicate condition of commercial real estate is being sustained by too-eager lenders.

“I think it is clear that CMBS is coming back — something that is probably positive in the short-term as far as jump-starting the investment marketplace and helping to establish a new baseline for pricing while, hopefully, alleviating some of the distress issues out there. But is it a good thing in the long run?” asks Garrick Brown, Northern California research director of Cassidy Turley BT Commercial asked.

“As the number of participants in CMBS lending continues to increase, the competition to originate loans eligible for new CMBS deals will be fierce,” said John O’Callahan, capital markets strategist for CoStar Group.  “Insurance companies, GSEs (government-sponsored enterprises), and even the healthier large banks will lend on the best properties in desirable markets, while CMBS originators will compete among themselves for the leftovers. They will have to cast a wider net across all markets to garner the volumes anticipated in 2011.”

Just 15 months after the initial CMBS issuance, structural, leverage and issuance amount trends have quickly changed, according to Standard & Poor’s. The ‘CMBS 2.0’ market started with the pricing of three single-borrower transactions with relatively simple structures in late 2009; more recent deals have been more complex, more highly leveraged and with significantly higher opening balances.  “Most recently, three $1.2 billion plus conduit/fusion deals were issued this month, each of which included an average of 10 principal and interest bonds and two interest-only classes.  Compared with late-2009 issuances, the newer multi-borrower deals have higher leverage, less debt service coverage and somewhat looser underwriting,” says Standard & Poor’s analyst James Manzi.

Despite the good news from February, Trepp LLC, a provider of commercial mortgage-backed securities (CMBS) and commercial mortgage information, analytics and technology to the global securities and investment management industry, found that the CMBS delinquency rate rose 9.34 percent in January. The value of delinquent loans exceeds $61.4 billion.  “While the rate continues to head higher, optimists can point to the fact that the rate of increase is significantly smaller than it was in the prior two months,” said Manus Clancy, managing director of Trepp LLC.  “Pessimists can counter that the jump comes despite the fact that new issues continue to make their way into the calculation and servicers continue to resolve troubled loans.”

The re-emergence of CMBS does not mean a return to the go-go years of 2004-2007. If $35 billion is issued in 2011, it will total just 15 percent of the peak.  Additionally, the revised underwriting criteria are far more conservative and issuances are smaller and geared toward low-risk assets.  Significantly, originators are more frequently required to retain stakes in the offering.  The CMBS market is expected to steadily climb this year and could see additional issuance in 2012, perhaps rising to $100 billion by 2013.  This would still be less than half the peak level of 2007, but a substantial amount, bringing desirable liquidity to the commercial real estate market.

Government Looking to Require CMBS Insurance

Tuesday, February 22nd, 2011

President Barack Obama is proposing an option to create an insurance fund for mortgage-backed securities, similar to the Federal Deposit Insurance Corporation that protects Americans savings accounts. The proposal consists of three legislative options for making long-term changes to the housing finance system, while taking short-term moves to gradually reduce the government’s role in the mortgage market now dominated by Fannie Mae and Freddie Mac.  The Obama administration is asking the private sector to play the leading role in the residential mortgage market and is expected to unveil several scenarios detailing how that might come about.

More than 85 percent of residential mortgages are now backed by the federal government.  Republicans want to slash that to zero, though they acknowledge that a transition so extreme cannot be achieved overnight.  At its core, the debate over what to do about Fannie and Freddie is an ideological one: How much should the government pay to sustain the housing market?  House Republicans, who want to abolish the government backing altogether, contend that the private market can more accurately price the risk of home mortgages.  By contrast, Democrats believe that government backing is necessary to assure that mortgages are accessible to middle-class Americans.  Mark Zandi, chief economist at Moody’s Analytics, said the impact would be approximately one percent.  “Regardless of what policymakers say, global investors will almost surely continue to believe the U.S. government would backstop a badly foundering mortgage finance system,” said Zandi, who has proposed a hybrid system that charges for the guarantee.

Meanwhile, Treasury Secretary Timothy Geithner has warned against acting too quickly or making rash changes.  “Given Fannie Mae and Freddie Mac’s current role in the mortgage market, we must proceed carefully with reform to ensure government support is withdrawn at a pace that does not undermine economic recovery,” he said.  “We believe there is sufficient funding to ensure the orderly and deliberate wind down of Fannie Mae and Freddie Mac, as described in our plan.

Geithner has proposed three options, all of which favor seeing the government eventually wind down Fannie and Freddie, whose survival has required more than $150 billion from the Treasury Department since the government seized them in September of 2008.  The first option would privatize mortgage finance and limit the government’s role to narrowly targeted subsidies, like Federal Housing Authority (FHA), USDA and Department of Veterans’ Affairs financing.  The second option adds a layer of government support that could be implemented to ensure access to credit during a housing crisis.  The third option, the one that bears the closest resemblance to the current system, would allow the government to guarantee mortgages but under stringent capital and oversight requirements, termed “catastrophic reinsurance behind significant private capital.”

The probable winners from replacing Fannie and Freddie are mortgage lenders and insurers, analysts at Goldman Sachs said. “While higher rates could decrease origination volumes, growth should still outpace balance-sheet availability,” the Goldman analysts said.  In addition to lenders, mortgage insurers are also potential beneficiaries.  “The stated goal of returning the (Federal Housing Authority) to its traditional role as a targeted lender of affordable mortgages supports the view for better-than-expected private market top-line growth.”

Despite the uncertainty about what entity will ultimately replace Fannie and Freddie, the Obama administration remains upbeat about the cost of winding down the embattled agencies. The administration expects its losses from Fannie and Freddie to ultimately be cut nearly in half.  However, the Treasury Department estimates that after receiving dividends from the GSEs (government-sponsored enterprises) for that assistance, the total losses could shrink to $73 billion by 2021 — 45 percent less than current levels.

An outspoken critic of the Obama plan is Mike Colpitts, who writes for The Housing Predictor.  According to Colpitts, “Like a solider standing alone in the battlefield, the Obama administration’s housing finance reform proposal offers the U.S. a way of ridding itself of the most troubled mortgage giants, Freddie Mac and Fannie Mae in the real estate collapse.  But it stops short of offering any concrete long term solutions with a housing plan for the nation like a lone soldier Missing In Action.  Realtors, mortgage professionals, new homebuilders and the lending industry compose many of the most fractured industries in the current U.S. economy as a result of the real estate collapse.  They deserve a plan on which they can rest their futures with the rest of America to benefit the entire nation, and for once provide concrete change towards a real economic recovery.”

Robert Knakal on the Bulls vs. the Bears – Who Do You Trust?

Monday, October 18th, 2010

Robert Knakal discusses whether the bulls or bears are right about the economy. Who’s right about the state of the economy and commercial real estate – the bulls or the bears?  Robert Knakal, chairman of New York-based Massey Knakal Realty Services, weighs both sides to help us cut through the mixed messages.

In a recent interview for the Alter NOW Podcasts, Knakal noted that the bulls like to cite the best back-to-back GDP growth since 2003 – 5.9 percent in the 4th quarter of 2009 and 3.2 percent in the 1st quarter of 2010.  Bears, on the other hand, believe that weak consumer spending will cause the GDP to grow at an anemic two to three percent for the rest of the year.  Knakal views this is an interesting dynamic because of the growing number of economists who back the bears’ position – numbers that are well below the trend coming out of a recessionary period.

Knakal, a graduate of the Wharton School of Business, also writes StreetWise, a nationally syndicated real estate industry blog, is concerned that many loans made by community and regional banks are five-year loans, which will mature in 2011 and 2012.  These loans raise the loudest alarms, because many are still performing thanks to very advantageous interest rates – possibly in the form of interest-only loans or with interest reserves that are carrying the property.  When these loans – which now could have an interest rate as low as two percent – mature, it will be renewed at a 5 ½ or six percent interest rate that will require a de-leveraging process.  Some $10 billion banks are carrying half of all their commercial real estate exposure in Small Business Administration (SBA) loans.

Despite the bears’ lack of confidence in the commercial real estate markets, capital is available to credit-worthy users chasing high-credit projects.  The amount of available private equity is currently estimated at approximately $173 billion.  Public REITs raised more in common stock offerings in 2009 than they did in the previous nine years.  Non-public REITs are expected to raise $10 billion this year.  Sovereign wealth funds are said to have access to an astonishing $3.5 trillion.  What Knakal cautions us to recognize is that these often represent the same pools of equity and to draw the distinction between capital that has been promised and that which is actually available.

 
icon for podpress  Robert Knakal on the Bulls vs. the Bears - Who Do You Trust? : Play Now | Play in Popup | Download

Real Estate Bonds More Attractive to Investors

Wednesday, September 1st, 2010

The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20.  Goldman Sachs and Citigroup are in the process of trying to sell their fourth CMBS package in 2010 with $788 million of debt from 48 properties as investor interest in these vehicles rekindles.  Although the Federal Reserve noted that commercial real estate is still slowing economic growth, bond investors believe that growth is strong enough for borrowers to meet debt payments.  According to Dan Castro, chief of structured finance analytics and strategy at BTIG LLC, “CMBS is an avenue that’s going to provide better returns.  There’s a lot of guys clamoring for these returns.”

Consider that corporate bond yields are only 177 basis points over Treasury, while CMBS yields are 100 bps higher.  According to Business Week, “The difference between the rate to exchange floating for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk.  It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities.  The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest level since April 20,” indicating increased confidence.  So while CMBS still has a ways to go to get back to previous levels, the market is in recovery which is great news for the rest of the industry which relies on CMBS for refinancing.

Next Up on the Presidential Agenda? Reforming Fannie and Freddie

Thursday, August 5th, 2010

Reforming Fannie Mae and Freddie Mac is next on President Obama’s to do list.  The next item on President Barack Obama’s ambitious agenda is likely to be overhauling Fannie Mae and Freddie Mac, the government-backed mortgage firms that so far have cost American taxpayers $145 billion to keep afloat.  The two firms, which own more than half of the nation’s $11 trillion in home mortgages, collapsed along with the housing market and were taken over by the federal government in September of 2008.

Many Congressional Republicans believe that scrapping Fannie and Freddie is mandatory; Democrats disagree and President Obama is expected to support reforms backed by consumer, real estate and banking groups.  The core of the emerging consensus is to preserve the 30-year, fixed-rate mortgage.  Susan Woodward, former chief economist at the Department of Housing and Urban Development (HUD) and a founder of Sand Hill Econometrics, said “People regard it as a right as Americans to get a 30-year, fixed-rate loan.”

Banks and builders agree with consumer advocates representing homebuyers that it’s good for the government to promote residential lending by supporting what Fannie and Freddie have done for years – purchasing mortgages and bundle them into securities that they sell to investors.  When the system works as intended, the MBS market creates additional money that is funneled back into the market to make new affordable loans.  The task is to determine how to accomplish this without the lax practices that the taxpayers had to pay for when catastrophic losses occurred in 2008.

The Obama Administration and leading Democrats strongly believe that the federal government should have a role in promoting homeownership.  Shaun Donovan, HUD Secretary, said “We should not compromise any of our core policy goals in the decisions we make in structuring our house financing system.”

Banks Are Hiring as CMBS Restarts

Thursday, July 15th, 2010

Banks are starting to hire again as they return to structuring CMBS, a sign that the financial markets are gradually returning to normal.  “I see lots of friends who used to be employed, and weren’t for a while, and are now being rehired by institutions,” said Jonathan Strain, debt capital markets director at JPMorgan Chase’s CMBS division.Banks rehiring staff to work on new CMBS.

This industry-wide hiring is evidence of the banking sector’s effort to recover from the depths of the Great Recession and rebuild the capability of providing liquidity to refinance commercial real estate owners who need to recapitalize their portfolios.  Industry leaders believe that CMBS may never recover to its 2007 origination peak of $237 billion.  So far this year, CMBS originations total just over $1 billion.  According to one banker, the CMBS market may eke out $10 billion in 2010; that could ultimately grow to a total of $100 billion annually several years down the road.

According to Lisa Pendergast, managing director with Jeffries Group, Inc., “Supply will be far less than what we were accustomed to.”  Pendergast also is president of the CRE Finance Council, the industry’s leading trade group.

Commercial Real Estate Is Recovering

Wednesday, June 30th, 2010

American commercial real estate is gradually regaining its value.After nearly two years of waiting, watching and hoping, American commercial real estate is finally regaining strength. This is one conclusion of the Reuters Global Real Estate and Infrastructure Summit held recently in New York City.  Starting in the fall of 2008, real estate investors feared there would be a wide-ranging sell-off of debt-laden commercial properties after Lehman Brothers collapsed.  And while office building and other commercial property values have fallen since the capital markets froze, the anticipated spate of foreclosures has not come to pass.  According to James Koster, president of Jones Lang LaSalle’s capital markets group, that is now unlikely to happen.

“We should be in a relatively good position to not have this other shoe drop,” according to Koster.  Banks have extended, restructured and modified loans to give the real estate industry the opportunity to regroup.  Values also are on the rise once again, although some properties whose loans were securitized are troubled.  The percentage of CMBS loans that are a month late in making payments climbed to 8.42 percent in May, according to Trepp, which follows CMBS performance.  Koster notes that special servicers who oversee troubled loans are not selling the properties at bargain basement prices.  Rather, they are holding onto them and being paid for managing them.

Institutional investors and REITs have the money to purchase good but debt-laden real estate.  When those properties hit the market, their price tags will be higher than two years ago.  “There is fresh capital coming in.  It’s a better market now,” Koster concluded.

Wells Fargo, LNR Looking to Sell $2 Billion in Distressed Assets

Thursday, June 3rd, 2010

One bank, one special servicer, both offering $1 billion in distressed real estate.  Wells Fargo & Company and LNR Property Corporation are hunting for buyers for $1 billion each of distressed commercial real estate assets and loans.  San Francisco-based Wells Fargo, the nation’s largest commercial real estate lender, is soliciting bids on $500 million to $1 billion worth of office and hotels.  LNR, the nation’s largest CBMS special servicer, is looking for buyers for approximately $1 billion worth of defaulted loans.

“The availability of capital and better prices than a year ago are driving sellers to move things off their balance sheets,” says Matthew Anderson, managing director at research firm Foresight Analytics.  “Depending on how the auction goes, you may see more of this.”  According to Anderson, banks and special servicers currently are holding approximately $185 billion in distressed loans.  Of those, Wells Fargo had $12.9 billion in non-performing loans in the 1st quarter.  LNR is the special servicer for $24 billion in delinquent assets, according to Bloomberg.

Wells Fargo and LNR were left holding real estate debt once the global credit crisis and recession sent commercial values down a whopping 42 percent from their October of 2007 high.  The majority – as much as 60 percent — of the assets that Wells Fargo is selling were inherited when the bank purchased Wachovia Corporation in October 2008.  If Wells Fargo and LNR can sell the properties, the move would represent an improved market for distressed assets, according to Ben Thypin, an analyst with Real Capital Analytics, Inc.

“We’re certainly aggressive in terms of liquidating the portfolio,” said David Hoyt, who heads Wells Fargo’s wholesale banking arm.  “At the moment, there is a lot of liquidity in the market to resolve problems.”